If you are in the workforce today, the chances you have a defined benefit pension plans are pretty slim. Outside of a few industries with active union membership, most corporations have done way with them as part of cost-cutting measures. Of those who lucky enough to have one, a recent study by Fidelity Investments found 71% of the individuals polled were unaware of the major details – they were unable to answer questions about simple things like when payments begin. If a pension is part of your retirement planning, here are a few keys to understand:
Pensions were originally intended, at least in part, to reward employee loyalty. In order to incentivize the benefit, employers created a timeline by which these accounts would “mature” to the full amount. If, for example, you become eligible for vesting after five years with the company, over the next five years you might have accrued 10% of the maximum allowed by the IRS. Five years after that, you might be up to 20%, and so on until the contribution limits are reached. This value cannot be taken from you, even if you were to leave the company – the account will be frozen until you reach retirement age.
Most defined benefit plans pay out in equal amounts on a periodic basis until the annuity is exhausted, but you have options as to how often the disbursements arrive. You can decide on monthly, quarterly or annual checks based on your preference and the balances you will receive from other parts of your investment portfolio. (Some even permit a one-time payment at retirement. Though you might choose to hold off on receiving them for a while if the stock market is flying high, you will have to make a decision by age 70 or April 1 of the year following your retirement, whichever is later.
In the event you pass on before the end of your pension annuity, the plan will set aside options to ensure your spouse is able to claim at least a portion of the amount you’ve accrued. Depending on the way your benefits are structured, particularly if you chose the joint/survivor option, it’s possible to continue the payment calendar with a minimum of 50% of the periodic disbursement and ensure your loved one is provided for when you’re gone.
No matter what stage you are at, retirement planning always seems to be an alphabet soup filled with all kinds of “similar but different” options: 401(k)s, Roth IRAs, and so on. The labels, as defined by the Internal Revenue Service (IRS), often overlap causing even more confusion. When you’re trying to set up an investment portfolio that guarantees your financial future after your last day of work, every little bit of clarity helps. With that in mind, here are three key differences between qualified and nonqualified annuities:
1. Tax Deferment
The primary means by which to distinguish your annuity is whether contributions are made before or after taxes are pulled out of your paycheck. For the most part, if pre-tax dollars are used to fund the account, such as in an employer-created 401(k), the IRS classifies it as “qualified” and will tax disbursements in the future. On the other hand, when you set aside part of your net earnings into an investment vehicle – a money market account or whole life insurance policy with cash value, for instance – you are participating in a “nonqualified” agreement in which taxes have already been paid.
2. Investment and Income Restrictions
Simply put, the IRS sets limits on the amount of qualified annuity contributions which can be made every year. Since 2009, the maximum amount that can be set aside in a 401(k) is $16,500 with an additional “catch-up” amount of $5,500 available to people over 50. Nonqualified plans, because they are made out of after-tax monies, have no ceilings – you can add as much as you can afford to your account, so long as the company you’re doing business with permits it (and most do).
In addition, there are income restrictions on certain types of qualified annuities: if you would like to fund a Roth IRA, you’ll have to earn less than $105,000. Though you may not be affected early in your career, as your earnings grow you’ll be exempt from contributing to an account which might allow another $5,000 investment for your retirement portfolio.
3. Mandatory Withdrawal Dates
Both types of annuities are subject to a 10% penalty if you withdraw from them earlier than six months before your 60th birthday, but there is no point at which you will be required to accept payments on your nonqualified account unless you agree to it. (Some insurance companies, as an example, might require them to begin at age 85.) However, if you have a qualified annuity, you’ll be required to receive the first disbursement no later than six months after your 70th birthday. The IRS uses life expectancy estimates to ensure monies are distributed – and taxed, since they haven’t been yet – to appropriately fund the golden years of retirees.
With all the options available, it can be tough to discern the best course. Be sure to consult with a trusted financial advisor before making any decisions, as they will best understand your goals and current portfolio make-up.
Confusion reigns after The Wall Street Journal reported a major policy shift from the American Association for Retired Persons (AARP) on Friday, June 17th. The country’s most powerful lobbying group for older citizens, long opposed to cuts in Social Security benefits, is now willing to admit the time has come. According to John Rother, AARP head of policy, “The ship was sailing. I wanted to be at the wheel when that happens.”
Opposition amongst membership began almost immediately, prompting AARP CEO A. Barry Rand to issue a statement later in the day against “inaccurate media stories” and “misleading characterization.” He went on to say AARP is “currently fighting some proposals in Washington to cut Social Security.” Though the program has long been known to be running out of time – funding reserves are estimated to disappear in 2036 – Rand reiterated, “Social Security should not be used as piggy bank to solve the nation’s deficit.”
Despite the statement, the change is said to have been approved by the organization’s board of directors. Evidence mounted as the group declined to join Strengthen Social Security, a group of 300-plus lobbying groups created to fight benefit cuts. Rand made it clear “any changes would be phased in slowly, over time” before going on to mention opposition to certain key issues is just as strong now as it was when the group took a stand against them in 2005.
“They are completely at odds with their membership,” said Nancy Altman, Strengthen Social Security co-chair. She noted AARP’s change would definitely carry weight in the Capitol, though perhaps at the expense of those it represents.
“I think they’re going to get burned,” said her fellow co-chair, Eric Kingson.
The AARP position shift is said to have limits, particularly with respect to ending the program for affluent beneficiaries. In addition, it has proposed tax increases to make the program financially stable again, meaning it will have no part in being used for national debt reduction. (Funding comes from outside the federal budget, so it doesn’t contribute to the deficit, either.)
The Obama administration is said to be looking to raise the retirement age and lower the index for annual cost of living benefit increases as part of a deal. These cuts would be offset by higher taxes on the wealthy, a move to improve revenue and create better long-term stability for the program.
“Social Security should be strengthened to provide adequate benefits and…sufficiently financed to ensure solvency with a stable trust fund for the next 75 years,” Rand asserted in the statement. Both Republican and Democratic representatives believe that minimum standard for solvency can be achieved by collecting more taxes and paying fewer benefits.
AARP has planned dozens of town-hall meetings across the country to explain the problem and possible answers, but selling the policy move to members will be difficult. According to a February poll from The Wall Street Journal and NBC News, resistance to cuts of any kind is high: 84% of Americans 65 and older oppose them. The group will be mindful of the larger ramifications, too. It lost 300,000 members after endorsing President Obama’s health-care law, which reduced Medicare by $500 million.
Having a proper Retirement Planning is a must.
Is Applying For Social Security retirement benefits a nerve wrecking task for you? Do you find yourself running from door to door asking what should be the actual procedure? Well, there’s nothing to worry about and “applying” is the easiest part of all.
Is applying for social security retirement benefits a nerve wrecking task for you? Do you find yourself running from door to door asking what should be the actual procedure? Well, there’s nothing to worry about and “applying” is the easiest part of all.
Social Security Number or SNN is the most vital number for any working US citizen. Through this program you get all the social protections, which include disability, poverty, unemployment, retirement, old age, and so on. This benefit is given through social insurance, income maintenance, different kinds of services, and of course, as social security benefits. In order to savor the sweetness of these social security fruits, you need applying for social security benefits in a proper way. Though the task may seem tortuous, you will certainly feel glad once checks start arriving.
The first question that must be popping out in your mind is: “how much would I get?” Well, you will get nearly 40% of your earnings to live on post retirement. So, Retirement Planning needs to be done very carefully as well. In order to be eligible for these benefits, you need to work for at least 10 years. You can start receiving these benefits once you attain the age of 62 years or can wait till 65. However, if you opt for receiving the benefits at the age of 62, the amount will be much less than that of 65. The more you would pay toward tax during the tenure of your employment, the more you will receive as benefits.
While applying for these benefits, you need to submit the things as follows:
- Social Security Number
- W-2 forms or tax returns (in case you are self-employed)
- Birth Certificate (if you are jointly applying with your spouse, then his/her birth certificate as well)
- Bank account details
- US citizen proof or lawful alien status (if you are not US born)
- Military Discharge Papers (in case you have served a term in military service)
Once you have al the necessary papers ready, you can make a call (toll free) to the Social Security Office or can apply online.
How do you think you’ll be able to double your Social Security Benefits? You may goose your retirement income by extending the start of the social security benefits up to age 62-70. However, if you find it hard to wait for so long, you may at least delay it till age 66. It is true that by taking up this approach, you may have to forgo a portion of your income in those initial years, but then, you are sure to make up this difference once the larger checks come pouring in.
Most people are pessimistic about this idea and think that social security checks will stop coming in with time. In fact, you may say that financial planners as well as regular citizens are pretty disdainful regarding the social security benefits. Today, almost all people qualifying for the social security benefits are keen on getting their hands on a check and that too at the earliest. Some, undeniably, have been compelled to go in for early retirement because of economic or health issues, but then, anybody who can avoid taking up the social security check early will certainly do a great favor by postponing the overall process. It is because opting for social security benefits too early slashes what the government offers.The benefits of Social Security are one of the well known retirement benefits that are available in the US and to avail these benefits one has to start giving importance to Retirement Planning.
Running a family single handedly is indeed a complicated job; hence the support of two incomes is of utmost importance. Now, the situation worsens in case of the sudden demise of the husband, a significant portion of the income finally disappears, thereby leaving the widow as the sole bread earner of the family. The situation turns out to be all the more crucial if the spouse had some illness before and a lot of expenses had incurred for the same. However, at this hour Social Security Benefits for Widows emerges as a ray of hope. This form of security helps widows to meet their needs. As per Joan Entmacher, “social security offers fifty eight percent of the income of widows aged over sixty five years when compared to thirty nine percent for all couples and individuals over sixty five years”.
Those who meet the eligibility criteria can apply for this security by either contacting at their nearest security office or by calling up at the same. For this, the widow needs to present the death certificate of her husband, the social security numbers (hers as well as her husband), divorce papers, birth certificate of the dependant child, worker’s recent tax return or W-2 form, bank account number and name of the account holder. At the end it all concludes that in order to avail all these Social Security benefits in future you must have your Retirement Planning done in present.
The last year has seen the largest increase in Social Security checks in the past 25 years with a rate of 5.8 percent. At the same time, as per the present law, the enrollees are also not going to get any cost-of-living adjustment in the next three years. In fact, the increment in Social Security is linked to the Consumer Price Index for the urban workers. It can be recalled here that the Consumer Price Index has decreased last year due to the plunging prices.
It’s the new retirees born in 1947and signed for the Social Security this year, rather than the current beneficiaries, who are going to get affected by the impact of the lack of Social Security boost. These people didn’t reap any benefit from the increase of Social Security last year. Moreover, there is every possibility that their purchasing power may erode by inflation before the cost-of-living increases once again in 2012. Andrew Biggs, a former deputy commissioner of the Social Security Administration and a resident scholar at the American Enterprise Institute has done an analysis to find out the possible impact of it on the retirees. According to the analysis, the new retirees may face a permanent benefit reduction of about 5 percent, while the benefits of the current retirees will remain the same.
Owing to the inflation hitch in 2008, newly retired couples are going to get a monthly Social Security check of $2,235. According to the calculations of Biggs, they will lose almost $1,340 per year. The calculation also says that, if the couple survives until the age of 83, they would lose around $25,000 in their lifetime.
It is not possible to evade this financial loss by delaying your retirement either, unless the cost-of-living gets adjusted, which is again projected to resume in 2012.